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Iliadis v. Wal-Mart Stores

May 31, 2007

MICHELLE ILIADIS AND ANGELA NELSON-CROXTON, INDIVIDUALLY ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS-APPELLANTS,
v.
WAL-MART STORES, INC., A DELAWARE CORPORATION, SAM'S CLUB, AN OPERATING SEGMENT OF WAL-MART, INC., DERRICK ZIMMER AND GLEN SPENCER, DEFENDANTS-RESPONDENTS, AND AND PRESENTLY UNIDENTIFIED JOHN DOES 1 THROUGH 10, DEFENDANTS.



On appeal from the Superior Court, Appellate Division, whose opinion is reported at 387 N.J. Super. 405 (2006).

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

In this appeal, the Court considers whether plaintiffs, hourly employees of defendant Wal-Mart Stores, Inc., can maintain a state-wide class action alleging that Wal-Mart denied them earned rest and meal breaks and forced them to work "off-the-clock."

Wal-Mart operates forty-four Wal-Mart stores, one Wal-Mart Supercenter, and nine Sam's Clubs in New Jersey. A corporate-wide policy governing rest and meal breaks -- Wal-Mart Corporate Policy PD-07 -- applies to all Wal-Mart hourly employees. Pursuant to that policy, employees are entitled to paid rest periods based on the number of consecutive hours in their shift. A shift of three to six hours merits one uninterrupted, fifteen-minute paid break, and a shift exceeding six hours earns two such breaks. The policy also entitles hourly employees to a supervisor-scheduled unpaid meal break of thirty minutes for every shift in excess of six hours. Failure to comply with the directives of Corporate Policy PD-07 subjects both supervisors and employees to discipline.

Wal-Mart policy also requires accurate payroll records. According to its Associate Handbook, Wal-Mart's expectation is that employees always clock in when they are working. The Handbook states that "working off-the-clock is not only against Wal-Mart policy -- it's against the law." Nonetheless, if an employee works off-the-clock, Wal-Mart has established a protocol allowing employees to submit documentation to correct discrepancies. The Associate Handbook, however, includes a disclaimer, expressly stating that it "is not a contract."

Plaintiffs contend that Wal-Mart systematically ignores and disregards these written policies. Wal-Mart, it is claimed, provides financial incentives to store managers to increase store profits by lowering store expenses. This environment allegedly has produced a work environment where Wal-Mart regularly contravenes uniformly-declared policy, as well as statutory and regulatory law. According to plaintiffs, that scheme and defendant's gross understaffing has made off-the-clock work essentially mandatory.

In addition to obtaining certifications from current and former employees supporting their respective contentions, both parties retained experts to substantiate their positions. Plaintiffs offered the report of L. Scott Baggett, Ph.D., a consulting statistician, who analyzed shifts from seven New Jersey Wal-Mart stores. He found a "statistically significant" deficiency in the quantity and duration of earned breaks. Baggett also discovered a practice of shift editing by management, such that pay for hours worked is minimized.

Baggett's report is consistent, in part, with the July 2000 findings of an internal, nation-wide Wal-Mart audit. An internal report on the audit concluded that stores were not in compliance with regulations concerning the allotment of breaks and meals. Soon after, in February 2001, Wal-Mart altered its policy, no longer requiring employees to clock in or out for their rest breaks. Wal-Mart asserts the change was benignly instituted because employees were paid for their rest periods, undermining the justification for documenting such breaks. Plaintiffs also submitted the report of a professor at Emory University, who reviewed time and attendance data from New Jersey stores and found a pervasive and consistent pattern of missed meal breaks and rest breaks.

Wal-Mart countered with the report of Paul F. White, Ph.D., a specialist in statistical analysis of employment practices, who criticized the findings and assumptions of plaintiffs' experts. White cited to what he claimed were methodological faults in the work of plaintiffs' experts. For example, White contended that Shapiro's report discounted alternative, legitimate explanations for missed breaks. In addition, White asserted that both Baggett and Shapiro improperly assumed that a missed punch of the time clock equaled a missed break.

The Law Division denied class status to plaintiffs, finding that manageability was "the impediment to certification." The court found that common questions did not predominate over the host of individual issues raised by Wal-Mart. The Law Division also rejected plaintiffs' statistical analysis, finding that it would deny Wal-Mart its ability to challenge the claims of individual class members and assert affirmative defenses. The trial court also held that class members had an alternative, superior avenue for redress -- the Wage Collection Division of the Department of Labor. Echoing the trial court's concerns, the Appellate Division affirmed. This Court granted plaintiffs' motion for leave to appeal.

HELD: The trial court abused its discretion in declining to certify the putative class action. Common questions of law and fact predominate over individualized questions, the class-action vehicle is superior to other methods of adjudicating this dispute, and the trial court's manageability misgivings can be overcome.

1. New Jersey courts, as well as federal courts construing the federal class action rule after which our Rule 1:32-1 is modeled, have consistently held that the class action rule should be liberally construed. Unitary adjudication through class litigation furthers numerous practical purposes, including judicial economy, cost-effectiveness and convenience. It also helps to equalize adversaries, a purpose that is even more compelling when the proposed class consists of people with small claims. When one inflicts minor harm across a dispersed population, the defendant is, as a practical matter, immune from liability unless a class is certified. This Court has been hesitant to provide defendants procedural shelter through restrictive reading of the class-action rule. (pp. 12-18)

2. A party seeking class certification first must establish that the four prerequisites of Rule 4:32-1(a) are satisfied. Here, the Law Division concluded that those requirements were satisfied, and the parties do not challenge that finding. In addition, the class applicant must also satisfy the requirements of one of the three alternative types of class actions described in Rule 4:32-1(b). The present appeal implicates Rule 4:32-1(b)(3), which requires that "questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy." An examination of the predominance and superiority requirements must include consideration of several factors, including "the difficulties likely to be encountered in the management of a class action." R. 4:32-1(b)(3)(D). The trial court declined to certify this class based on the manageability factor. (pp. 19-21)

3. The answer to the issue of predominance is found in a close analysis of the facts and law. The core of the present dispute is whether Wal-Mart engaged in a systematic and widespread practice of disregarding its contractual, statutory, and regulatory obligations by refusing to provide earned rest and meal breaks and by encouraging off-the-clock work. Essential to that issue are common questions, most notably the meaning and significance of Wal-Mart's corporate policies and the impact of the Associate Handbook disclaimer and new employee orientation. Common evidentiary questions also surround the expert reports of the parties, Wal-Mart's internal audit, and Wal-Mart's other business records. The individualized defenses advanced by Wal-Mart do not foreclose a finding of predominance. Class certification does not limit a defendant's rights to pursue any defense on any of a plaintiff's claims -- it merely permits litigation of common issues on a class basis before litigation of individual issues. The Court is confident that, on remand, the trial court and parties' counsel can resolve the practical challenges presented by this litigation's individualized questions of law or fact. (pp. 22-31)

4. In addition to predominance, a party seeking certification is required to demonstrate that class litigation is superior to other available methods. The class members' lack of financial wherewithal is an important factor in the superiority analysis. Because of the very real likelihood that class members will not bring individual actions, class actions are often the superior form of adjudication when the claims of the individual class members are small. The Court finds that the Wage Collection Division of the Department of Labor is an inferior forum for adjudication of this controversy, primarily because of the nominal value of each class members' claim. The Court cannot ignore the reality that if the proposed class is not certified, thousands of aggrieved employees will not seek redress for WalMart's alleged wrongdoing. Therefore, the Court holds that class-wide resolution of the present controversy is superior to other available methods for its fair and efficient adjudication. (pp. 32-35)

5. Manageability, a consideration that encompasses the whole range of practical problems that may render the class action format inappropriate for a particular suit, is the most hotly contested factor in analyzing predominance and superiority. Denial of class status due to manageability concerns is disfavored and should be the exception rather than the rule. A finding of unmanageability requires more than mere difficulty in trying the case or the existence of novel challenges. Here, the Court is satisfied that the likely manageability obstacles of the present litigation can be overcome. Courts in California and Pennsylvania have conducted trials of similarly-pled, state-wide class actions against Wal-Mart. Our trial courts are equally capable of managing such litigation. The Court is confident that the Law Division will properly employ its broad, equitable authority to craft remedies and procedures that address the concerns of the parties and the peculiar problems of this class action. (pp. 35-40)

The judgment of the Appellate Division is REVERSED, and the matter is REMANDED for entry of an order certifying the class.

JUSTICE RIVERA-SOTO has filed a separate, DISSENTING opinion, expressing the view that he cannot find in this record a basis to support the majority's conclusion that the trial judge abused her discretion when she denied plaintiffs' class certification application.

JUSTICES LaVECCHIA, ALBIN, WALLACE and HOENS join in CHIEF JUSTICE ZAZZALI's opinion. JUSTICE RIVERA-SOTO has filed a separate, dissenting opinion. JUSTICE LONG did not participate.

The opinion of the court was delivered by: Chief Justice Zazzali

Argued April 5, 2007

The named plaintiffs, former hourly employees of defendant Wal-Mart Stores, Inc., allege in their class-action complaint that Wal-Mart, through centralized control over business operations, denied them earned rest and meal breaks and forced them to work "off-the-clock." In seeking to represent a statewide class of similarly-situated Wal-Mart hourly employees, plaintiffs claim that defendant engaged in widespread conduct in contravention of published corporate policy, statutory law, and administrative regulations. Citing concerns about the manageability of the litigation, the trial court denied class certification to the proposed class of approximately 72,000 current and former Wal-Mart employees. The Appellate Division affirmed.

In this appeal, we must determine whether the putative class of current and former employees may be certified pursuant to Rule 4:32-1. We find that common questions of law and fact predominate over individualized questions and that the class-action device is superior to other available methods of adjudicating this dispute. We therefore reverse and remand for the entry of an order certifying the class. By allowing this manageable litigation to proceed, we permit a class of hourly, retail employees to unite and -- on an equal footing with their adversary --- to seek relief for their "small claims" that arise from defendant's alleged violation of contractual promises, statutory enactments, and regulatory mandates.

I.

A.

Plaintiffs ask us to certify a class of "all current and former hourly employees of Wal-Mart (including Wal-Mart Stores, Supercenters and Sam's Clubs) in the State of New Jersey during the period May 30, 1996 to the present," (formatting altered), a class consisting of approximately 72,000 workers. When deciding whether to certify a class, we "accord[] plaintiffs every favorable view" of the complaint and record. Riley v. New Rapids Carpet Ctr., 61 N.J. 218, 223 (1972); see also Delgozzo v. Kenny, 266 N.J. Super. 169, 181 (App. Div. 1993) (accepting as true all substantive allegations of party seeking certification).

Plaintiffs allege that Wal-Mart, in an effort to reduce labor costs and increase profits, systematically declined to honor its contractual promises concerning rest and meal breaks. Plaintiffs also maintain that Wal-Mart failed to compensate its employees for all time worked by forcing employees to work through meal breaks, by locking employees in retail stores after they had clocked out, and by coercing employees to work off-the-clock. Premised on those allegations, the putative class advances nine causes of action: (1) breach of implied-in-fact contract regarding missed rest and meal breaks; (2) breach of implied-in-fact contract regarding off-the-clock work; (3) breach of unilateral contract regarding missed rest and meal breaks; (4) breach of unilateral contract regarding off-the-clock work; (5) breach of the covenant of good faith and fair dealing; (6) violation of the New Jersey State Wage and Hour Law, N.J.S.A. 34:11-56a to -56a30 (requiring overtime pay); (7) violation of N.J.A.C. 12:56.5.2 (mandating compensation for all hours worked); (8) entitlement to restitution; and (9) unjust enrichment.

Defendant operates forty-four Wal-Mart stores, one Wal-Mart Supercenter, and nine Sam's Clubs in New Jersey. Wal-Mart, 2007 Annual Report 63 available at http://walmartstores.com/Files/ 2007_annual_report.pdf [hereinafter Annual Report]. Management within those stores is multi-layered, with numerous managers supervising hourly employees who are categorized in approximately eighty-five different Wal-Mart job classifications and one hundred Sam's Club job classifications.

A corporate-wide policy governing rest and meal breaks --Wal-Mart Corporate Policy PD-07 -- applies uniformly to all Wal-Mart hourly employees. Pursuant to that policy, employees are entitled to paid rest periods based on the number of consecutive hours in their assigned shift. A shift of three to six hours merits one uninterrupted, fifteen-minute paid break, and a shift exceeding six hours earns two such breaks. Each hourly employee's immediate supervisor is responsible for scheduling rest breaks.

Corporate Policy PD-07 also governs meal breaks. That policy entitles hourly employees to a supervisor-scheduled unpaid meal break of thirty minutes for every shift in excess of six hours. If a rest or meal break is interrupted by work, in addition to providing a substitute break, Wal-Mart policy requires the company to compensate the affected employee for the time worked. Failure to comply with the directives of Corporate Policy PD-07 subjects both supervisors and employees to discipline. In fact, a former President and Chief Executive Officer of the Wal-Mart Stores Division referred to Corporate Policy PD-07 as "the LAW," stating that its mandates are "NOT optional."

Wal-Mart policy also requires accurate payroll records. "No Wal-Mart Associate should perform work for the Company without compensation," and failure to adhere to that rule may warrant discipline. According to its Associate Handbook, WalMart's "expectation is very clear":

Always clock in before beginning your work day and at other appropriate times . . . Your hard work is appreciated, and we want to pay you for this work. Remember, working off-the-clock is not only against Wal-Mart policy -- it's against the law. Always clock in when you are working -- Always! There are no exceptions.

Nevertheless, if an employee works off-the-clock, Wal-Mart has established a protocol to ensure appropriate compensation, allowing employees to submit documentation to correct discrepancies.

The foregoing policies are widely disseminated and communicated to employees through varied media. For example, the policies are explained to new employees at their orientations and reinforced in an Associate Handbook. However, that handbook includes a disclaimer, expressly stating that it "is not a contract."

Plaintiffs contend that Wal-Mart systematically ignores and disregards those written policies. Wal-Mart, it is claimed, provides financial incentives to store managers to increase store profits by lowering store expenses. This approach allegedly has produced a work environment where Wal-Mart regularly contravenes uniformly-declared policy, as well as statutory and regulatory law. According to plaintiffs, that scheme and defendant's "gross[] understaffing" of its retail stores has made off-the-clock work "essentially mandatory," as evidenced by corporate e-mail encouraging store managers to "get volunteers" to "cut hours."

In addition to obtaining certifications from current and former employees supporting their respective contentions, both parties retained experts to substantiate their positions. Plaintiffs first offered the report of L. Scott Baggett, Ph.D., a consulting statistician, who analyzed 31,466 shifts from seven New Jersey Wal-Mart stores. Baggett found a "statistically significant" deficiency in the quantity and duration of earned breaks. Per pay period, Baggett noted that ninety-three percent of employees suffered a shortfall in the length of their earned breaks and eighty-five percent of employees experienced a deficiency in the number of earned rest and meal breaks. Baggett then supplemented his report, finding that nearly sixty-three percent of employees in the sample experienced at least five missed or shortened breaks per pay period. Additionally, Baggett estimated that the members of the proposed class suffered a deficiency of 1.3 million hours in earned rest periods since 1996. In a word, "[a]ssociates did not receive the rest break time nor the meal time they earned."

Baggett also discovered a practice of shift editing by management. Specifically, when an employee failed to punch out at the end of a shift, the employee was credited with only a one-minute-long shift, regardless of the employee's actual time worked. Baggett recorded 250 management-edited one-minute shifts in his sample, leading him to observe that "[a] disproportionately large number of shifts are edited by Wal-Mart management such that pay for hours worked is minimized."

Baggett's report is consistent, in part, with the July 2000 findings of an internal, nation-wide Wal-Mart audit. Conducted over a week-long period, that audit of 127 Wal-Mart stores, including at least one New Jersey store, was distributed to senior officials including regional vice presidents. The internal report concluded that "[s]tores were not in compliance with company and state regulations concerning the allotment of breaks and meals as 76,472 exceptions were noted."*fn1 Soon after, in February 2001, Wal-Mart altered its policy, no longer requiring employees to clock in or out for their rest breaks. Although plaintiffs are suspicious of the policy shift's timing, Wal-Mart asserts that the change was benignly instituted because employees were paid for their rest periods, thereby undermining any payroll justification for documenting such breaks.

Plaintiffs also submitted the report of Martin M. Shapiro, Ph.D., a professor at Emory University. His review of time and attendance data from New Jersey stores revealed a "pervasive and consistent pattern of missed meal breaks . . . and . . . missed rest breaks." For example, he found that employees who were logged out for payroll purposes were simultaneously logged on to cash registers and training devices, indicating off-the-clock labor.

Wal-Mart countered with the report of Paul F. White, Ph.D., a specialist in statistical analysis of employment practices, who criticized the findings and assumptions of Baggett and Shapiro. White contended that Shapiro's report disregarded structural differences between the analyzed databases and discounted alternative, legitimate explanations for missed breaks. For example, White observed that missed breaks are often voluntary and the result of personal circumstances, such as an employee's desire to leave work early for an appointment or familial responsibilities. In addition, White asserted that both Baggett and Shapiro improperly assumed that a missed punch of the time clock equaled a missed break. Because of those methodological faults, White declared that Baggett's "naïve approach ignore[d] reality" and described Shapiro's conclusions as "vague and unsubstantiated."

B.

The Law Division denied class status to plaintiffs, finding that manageability was "the impediment to certification." In view of that concern, the trial court held that plaintiffs failed to satisfy the "critical question" whether their allegations met the predominance and superiority requirements of Rule 4:32-1(b)(3). The court found that the litigation's common questions did not predominate over the "host of individual issues" raised by Wal-Mart, issues premised on "variations in the employee population." The court also rejected plaintiffs' statistical analysis, finding that the proffered expert reports did not "resolve, or obviate the need for resolution of, individual issues of injury and the quantum of damages." Rather, the court found that plaintiffs' statistical evidence would deny Wal-Mart its ability to challenge the claims of individual class members and assert affirmative defenses: "The issue is whether Wal-Mart can be deprived of contesting issues regarding individual employees. If the answer is no, which is what this [c]court believes, common issues do not predominate."

The trial court also held that class members had an alternative, superior avenue for redress -- the Wage Collection Division of the Department of Labor under the Wage and Hour Law, N.J.S.A. 34:11-56a to -56a30. According to the Law Division, that "virtually cost free" forum was superior to class litigation. The court concluded that "the overwhelming difficulty of managing this class action due to the individual issues that must be addressed . . . [and] the fact that employees have an inexpensive and efficient remedy, causes this ...


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